Monetary vs. Fiscal Policy

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Transcript of Monetary vs. Fiscal Policy

What is Fiscal Policy?Unlike Monetary Policy, Fiscal Policy is ran by the Federal governmentTypes of Fiscal PolicyExpansionary Fiscal Policy: During a recession, the government will try to boost the economy by:

In Review...What is Monetary Policy?The controlling of the supply of money AND the cost of borrowing money (credit)

These both depend on the needs/status of the economyReserve RequirementsHow much money is REQUIRED for a bank to keep on hand (RESERVE)What are the types of Monetary Policy?The Federal Reserve (Fed) will enact EXPANSIONARY Monetary Policy in a recession to put money into circulation.Monetary PolicyFiscal PolicyCONCLUSION:On a half sheet of paper, please answer the following questionsMonetary vs. Fiscal PolicyTHANK YOU!Economics Unit 2-Section 5The Fed (Federal Reserve) increases or decreases the supply of moneyGoals:Price StablilityGDP growthInvestmentFight recessionDesired level of unemploymentDiscount RateThe interest rate that the Fed charges banks for loansOpen-Market OperationsThe purchasing or selling of bonds and/or treasury billsBanks are required to keep a certain percentage of their money in Federal Reserve Banks as well as their deposits from consumers---> ReserveIf the Fed raises RR, banks must leave more money with the Fed, having less money to lend to peopleIn a recession, the Fed lowers the RR, allowing more money to be loaned out to consumersFederal Funds Rate (FFR): Money that banks lend each other (Bank of America lending $$ to Chase)

Discount Rate (DR): Money that the Fed lends to banks if they are in trouble/have low amountsIn a recession, the DR is lowered so that banks are more likely to lend from the Fed and able to loan money to people.Bonds: "Contract" that you buy from the government that they will buy back later; generate interest over time (many of you probably got this as a gift when you were little)In a recession, the Fed will buy back bonds from people and hope to stimulate the economyThe Federal Reserve (Fed) will enact CONTRACTIONARY Monetary Policy in an expansion to slow down the economy by taking money out of circulation.The government helps regulate the money supply through taxation and spendingFiscal Policy is meant to do two things:

1) Combat inflation during Expansions

2) Reduce Unemployment when GDP falls (Recession)Fiscal Policy was started by John Maynard Keynes also known as Keynesian EconomicsContractionary Fiscal Policy: During an expansion, the government will try to slow the economy by: